U.S. Corporations Pay 35% – A new study shows America’s competitive tax disadvantage.

Wall Street Journal
Review & Outlook
Oct. 27, 2013

Our readers know that the statutory U.S. corporate tax rate of 35% (plus another 4.1% average state rate) is the highest among developed nations. Yet the myth persists that most American companies somehow pay little or no tax. Now comes a new study showing that the tax burden is as punitive as advertised.

The tax evasion fable got new legs in July when the Government Accountability Office released a study concluding that the effective U.S. corporate tax rate is only 12.6%. The effective rate is what corporations actually pay after deductions and credits.

The Washington Post, WPO +1.97% CNN, Bloomberg and others jumped on the story and seemed to ask the same question: What are American companies complaining about? Senator Carl Levin, a one-man wrecking crew of American job creation, declared that the GAO study proved that “America’s large, profitable corporations are now paying a lower tax rate than our teachers and firefighters.”

Except it appears that the GAO researchers were off by a statistical mile. Andrew Lyon, an international tax expert at PricewaterhouseCoopers, writes in the academic journal Tax Notes this month that GAO didn’t count all corporate taxes paid.

Another blunder was that the research examined only one year of data, 2010. Mr. Lyon finds that this produced “unrepresentative results” because 2010 “follows the severe 2007-2009 recession.” In 2010 corporate taxes fell to their lowest level in many years due to write-offs from prior year losses.

Mr. Lyon used GAO’s model but extended the analysis over a more representative period of years, 2004-2010. He also counted all taxes paid world-wide, including foreign, state and local taxes. His conclusion: “The effective tax rate based on worldwide current tax payments for all U.S. corporations exceeded 35 percent for the 2004-2010 period.”

His findings are in line with many other studies. The Tax Foundation found in 2011 that the effective tax rate on new corporate investment in the U.S. is 29.8% versus 22.4% among America’s rivals.

It is true that some companies pay a lower effective rate, and some industries are taxed less than others. We’ve written about Whirlpool WHR -0.73% and other companies that have taken advantage of green-energy subsidies to pay a lower rate in some years.

But these exceptions to the general high-tax American rule aren’t the result of corporate scheming. They are the consequence of deliberate tax favors promoted by the likes of Carl Levin and his Washington mates. Mr. Levin wants it both ways: Take political credit and campaign cash for passing tax favors, but then demagogue companies for exploiting those favors. One goal of tax reform is to reduce this political mediation in the cause of fairness and economic growth, but Mr. Levin doesn’t want to give up his power.

The Tax Foundation reports that since 1997 31 of 34 leading economies have cut their corporate tax rates to attract jobs and capital. They must know something that Congress doesn’t, because the U.S. is one of the three laggards. The other two are Chile and Norway. Every year that the U.S. fails to reform its tax code, America becomes less competitive and more jobs are put at risk.